07 Feb 2023

Taxation Readers’ Forum: Transferring land into company

Insights, Publications

Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about the tax consequences of transferring land into a company for a development deal.

‘My client is the grandson of an elderly farmer who is a sole trader. Sadly, his grandfather (G) is in a state of failing health.

Without taking tax advice, the farmer’s solicitor and building development promoter formed a limited company (Newco) for the purpose of the development deal with an anticipated life span of the proposed deal. The Newco set up has my client as a director and 40% shareholder.

The promoter’s reasoning for forming the limited company was that the development does not become caught up in any potential probate administration and the grandson can ‘sign all future documents so that development matters can progress’. The potential development land has been transferred into Newco.

We were approached by the grandson and his parents as they are worried that the grandson will have unseen tax problems from the ‘gift’ of the land into the company. They are also worried for G as no SDLT [stamp duty land tax] was paid on the transfer of the land into Newco and he has been told that there are no tax consequences of putting the land into Newco.

A further complication arises in that the land has been farmed under an Agricultural Holding Act 1986 (AHA 1986) tenancy by G all his life (and his father before him). The land was bought by G in the last year from the landlord at a much reduced cost because of the AHA 1986 tenancy and there was no punishing overage agreement.

The land has very positive chances of development and has apparently not been valued going into the company. There are tax worries by the grandson on his reading of tax articles online. He has been promised the farm in return for working for a reduced wage, and is very concerned that his much cherished (but stubborn) grandfather is not receiving correct tax advice on the proposed development.

What are the tax concerns for my client and his grandfather?’ Query 20,075 – Furrowed Farmer.

Terry Jordan’s reply: Liability to SDLT arose on the gift into the company.

‘Furrowed Farmer’s client’s grandfather has transferred land into Newco which is owned as to 40% by the grandson who is also, we are told, a director.

We are not told who owns the remaining 60% of the shares and it may be some combination of the grandfather and the developer. The stated reason was so the grandson can ‘sign all future documents so that development matters can progress’. On the assumption that the grandfather does own shares it would apparently be necessary to obtain a grant of probate in his estate to deal with those shares and his other assets in due course.

As the wider family surmise there are, unfortunately, potential pitfalls in what has been done. On the face of it, a liability to stamp duty land tax arose on the gift into the company. The gift constituted a disposal for capital gains tax purposes with a sizeable gain as the grandfather acquired the land at a reduced cost in view of the agricultural holding act (AHA) tenancy, and it may be possible to claim holdover relief under TCGA 1992, s 165 and Sch 7 para 1.

It is also necessary to consider inheritance tax. Although, on the face of it, the transfer may look like a potentially exempt transfer (PET), to the extent that shares were owned by persons other than the grandfather, the transfer was immediately chargeable and, therefore, not potentially exempt.

Accordingly, it will be necessary to consider agricultural property relief and business property relief as the former would apply only to the agricultural and not to the development value of the land.

The decision in the Nelson Dance case ([2009] STC 802) may be of assistance here, although the retention rules in IHTA 1984, s 124A and s 113A would need to be considered should the grandfather die within seven years of the transfer.

Reference could usefully be made to Malcolm Gunn’s article ‘Woe, thrice woe!’ (Taxation, 24 August 2017).

With regard to the promise made to the grandson that he would receive the farm in return for working for a reduced wage, it may be that the grandfather has left his shares and other assets to him in his will. If he has not, the grandson may need to consider a claim on the basis of proprietary estoppel. That would require him to demonstrate the following criteria:

  • an unambiguous promise by words or conduct;
  • reliance on that promise to his detriment; and
  • that it would be unjust or unconscionable for the grandfather to go back on the promise.

The potential proprietary estoppel claim is, however, far beyond the scope of this reply.’

The full article is also available on the Taxation website.

Our experts in private client tax and property tax can advise on tax-efficient structuring and asset transfers. For more information, please get in touch with your usual BKL contact or use our enquiry form.